National Pension Scheme (NPS)

During one’s earning phase, one may contribute all through the working life to ensure robust retirement funding. One can start small and increase contributions as and when income increases. There is no upper limit in the number of contributions to be made per year.

The subscriber is free to manage the frequency and amount of contributions. S/he can contribute at any point of time in a Financial Year as also change the amount S/he wants to set aside every year.

A subscriber can contribute regularly in a pension account  ( also called Tier -1 account ) during his/her working life, withdraw a part of the corpus as a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

NPS gives a flexibility in choosing their own investment options as per their risk-return expectations.

Investment Choices:

Investment style of NPS – It gives 2 options to the investors – one being an “auto choice” option and the other being an “active choice” option.

 ‘Auto choice’ opts a lifecycle-based approach having pre-defined asset allocation ratios. While ‘Active choice’ gives an option to the investor to decide the asset class allocation on their own.

Auto choice has three Life cycle (LC) fund options.  In each option, equity allocation is capped at a certain level – LC25 (with 25% Equity Investment choice), LC50 (with 50% Equity Investment choice) and LC75 (with 75% Equity Investment choice).

Active choice gives option of Equity, Corporate Debt, Government securities and Alternative Investment fund (limited to 5% allocation) investments. Active choice has a cap on Equity Investment of 75% upto age of 50 reducing by 2.5% every year limiting it to 50% upto age of 60.

These options give flexibility to the investors to allocate across asset classes as per their needs & risk tolerance.  The subscriber also has the option to choose the Fund Managers and the Annuity Service Provider.

Lock-In Period:

NPS has a lock-in till the age of 60 years of the individual. It works both as an advantage as well as a disadvantage.

It’s an advantage that the money stays invested for Retirement funding purposes till age 60.  However, money can be withdrawn upto certain limits, upto three times during the policy period for specific emergencies.  This can diminish the accumulation to an extent.

The fact that NPS money cannot be accessed for purpose other than Children’s education, Marriage expenses, House construction or Medical emergencies till 60 years, can be seen as a disadvantage. However, NPS was never meant to be a liquid investment, in the first place.

Tax Saving:

Tax saving on self-contribution is a great feature of NPS.

There is an additional deduction of Rs.50,000 [section 80CCD(1B)] over and above the Rs.1,50,000 deduction under section 80C.  This gives another incentive for people to save through NPS for their retirement funding needs. However, NPS should not be looked at as a tax saving instrument in isolation.

Retirement funding is critical & NPS is a great way to do it